US RevPAR decline grows in October
US RevPAR decline grows in October
25 NOVEMBER 2020 10:09 AM

U.S. hotels had a slightly worse October than September as the trend with year-over-year RevPAR declines reversed.

NASHVILLE, Tennessee—U.S. hotel October data was slightly worse than September’s data and points to continued weakness across all sectors of the industry.

1. RevPAR declines a bit worse
October revenue per available room declined 48.8%, and a “better than -50%” performance was expected, but still it is a bit harsh to see that sequentially from September data actually got worse. I guess my thinking was the performance was already so depressed, each month should at least show a minimal improvement—just like we saw between September and August. Alas, it was not meant to be:

Source: STR, © 2020 CoStar Realty Information, Inc.

The reason for this was likely the slowing of leisure travelers who, while still taking advantage of summer days and rates after Labor Day, eventually returned home. Combine this with continued lack of business travel because offices are still empty and the outcome is that the results are slipping. And there really is no improvement on the horizon.

2. Cognitive dissonance
In psychology, cognitive dissonance is the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, ideas, or values at the same time.

The two numbers that could cause an observer said condition are “1 million” and “+10%”. The following chart should strike fear into the hearts of hoteliers, lenders, and DMOs across the land—since it likely has impacted the traveler psyche already. In the week ending 14 November the U.S. registered 1 million new COVID-19 cases.

Source: STR, © 2020 CoStar Realty Information, Inc.

Given this, it is no wonder that when Ugur Sahin announced from his company BioNTech’s headquarters in Mainz, Germany, that its vaccine was 95% effective that the stock market analyst community lost its collective mind. Analysts basically conjectured that this meant that the virus is over and done with and that travelers will be back in hotel lobbies and hotels will make money again. That at least is what you must infer when you read the stock market reaction, especially in the lodging stocks, on 16 November. The average increase was around 10%.

Source: STR, © 2020 CoStar Realty Information, Inc.

So, yes, an effective vaccine is of course great news, but it will be a while until it is accessible to the individual traveler. And will we see 1 million more infections, and corresponding deaths, per week, for weeks on end this winter while the vaccine is being prepared—keeping people at home longer still? That question likely caused the stock rally to be short-lived and a week later most of the increase had dissipated. “Buy the rumor, sell the facts” is the old stock market adage that seems to have been at play here.

3. New STR forecast
At the virtual NYU conference our CEO Amanda Hite presented the latest STR forecast. Good news is that it got a tiny bit better for 2020. Leisure travel was a little bit stronger than we had expected at our last go-around in August, so we now expect that this year’s RevPAR decline is (slightly) better than -50%.

Source: STR, © 2020 CoStar Realty Information, Inc.

Our 2021 outlook has not changed much and next year will be written about as the year with the single best RevPAR increase ever. Despite the vaccine news (see above) we did not change our conviction for next year simply because our friends from Tourism Economics, Adam Sacks and Aran Ryan, two of the smartest guys in any room, had already “baked in” news of this sort when we discussed our earlier forecasts. In other words, they always knew that this news would come, they did not know when or through whom, but it was expected and therefore considered.

Despite the corresponding increase in demand, we continue to forecast underwhelming average daily rate increases next year and in the coming years for that matter. It’s hard to see a catalyst for strong pricing power when basically half the rooms in the U.S. stand empty.

4. Segmentation data
The third time is quite charming indeed and in October the number of group rooms sold topped 1 million again for the third month in a row. It is still hard to fathom any big multinational corporation flying its sales team to a weeklong product kickoff event at a downtown high-rise hotel, so the assumption remains that SMERF (Social, Military, Education, Religious and Fraternal) groups make up a large portion of the count.

In addition, association events also must take place to fund the association’s ongoing business. And there are, of course, some smaller corporations who make meetings happen. But I would think those are few and far between.

Source: STR, © 2020 CoStar Realty Information, Inc.

Unfortunately, the group rooms sold equate to an actual occupancy of 5% (Five!). RevPAR change in the group space has not moved much from the 90% decline earlier in the year and nothing suggests that the data will get meaningfully better this year or in early 2021. Here are the October results in detail:

Source: STR, © 2020 CoStar Realty Information, Inc.

5. In-Construction (I/C) Pipeline
Just like in prior months, the number of U.S. hotel rooms in construction is skewed toward limited service with seven in 10 rooms being built at the lower price point. You might be thinking, “Jan, you say this every month, it’s boring.” Well, here is a slightly different way of looking at that data set: Let’s compare the rooms coming online to the total stock by class and this picture emerges:

Source: STR, © 2020 CoStar Realty Information, Inc.

Looks like the small count of 13,300 luxury rooms is actually 12% of the existing luxury inventory, so that new supply will matter to future performance. Now, these are weird times (understatement!) and more than 10% of all luxury rooms are still temporarily closed, hence the “percent of existing” count is likely overstating the reality of the impact.

The way I think about this percent is that I assume the projects at the luxury end take three years to complete. When you do that math in your head, you get a roughly 4% increase per year over the next three years. A year ago, in October 2019, the increase in luxury rooms was around 2.3%. You see what I am getting at: Even though the absolute number of luxury rooms in construction is small, the relative impact on the luxury scale could be material.

For the other classes I divide the “percent of existing” by two, assuming that the hotels will open over the next two years, and you see that the growth rates continue to tell the same story. Upscale branded properties will see a lot of influx, but that is not different from the 4% supply increases over the last few years. Economy hotels are not seeing much competition on the horizon, but that is not really a fair statement since a lot of the competition comes from reflagged properties and in this chart we only look at new-builds. But one takeaway could be that if you have a brand-new economy branded hotel, you may have a competitive advantage.

Jan Freitag is the SVP of Lodging Insights at STR and National Director for Hospitality Market Analytics at CoStar.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

*Correction, 30 November 2020: The previous version of this article included a chart with an incorrect date. 

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